Refinancing an upside-down car loan

An upside-down car loan is a loan that exceeds the current value or resale price of the car. It’s no fun at all to find the trade-in value of your car is $3,000 when you still owe $5,000. Nevertheless, many people are in exactly that situation. About 38 percent of those who trade in their old cars in order to purchase new ones owe more on their trade-in than it’s worth, according to the Power Information Network, an affiliate of market researcher J.D. Power and Associates.

New car loans go upside down when the car is depreciating faster than the purchaser is building equity. If you stretch the term of your loan to five years or more in order to get the lowest possible monthly payments, the check you send your lender each month may cover little more than interest on the purchase price. You can see how increasing the loan term and reducing monthly payments – and vice versa – affect the cost of a car loan by using our monthly payment calculator.

If you are in this situation, the best thing you can do is hang on to your car and pay it off as quickly as possible. You may want to investigate refinancing your auto loan with a home equity loan, which will likely carry a lower interest rate.

If you refinance at a lower interest rate and keep your monthly payments the same, you will pay down the loan principal faster. If you can afford it, speed things up even more by shortening the term of the loan and increasing your monthly payments.

You can also accelerate paying off your existing loan by making extra payments.